Canadian Dollar Up After Losses Fail to Breach Technicals

The Canadian dollar posted its
biggest gains against its U.S. counterpart in almost a month
after four straight days of losses as the currency failed to
fall below a key technical level.

The loonie, as the currency is nicknamed, hasn’t weakened
past C$1.01 per U.S. dollar since the Bank of Canada scaled back
growth forecasts on Jan. 23. The relative strength index for the
currency versus the greenback indicated for the past three days
the Canadian dollar’s recent decline may have been too far, too
fast. The nation’s economy may have grown faster in November
than the month before, according to a Bloomberg News survey of
economists before a Jan. 31 report from Statistics Canada.

“The market, more or less, traded pro-risk most of the
day,” said Darcy Browne, managing director of currencies at
Canadian Imperial Bank of Commerce’s CIBC World Markets unit, by
phone from Toronto. “I think it’s just taking its indications
from what else is going on, and I think two or three days of
pushing on that C$1.01 top without any joy, I think the market
decided to take a little profit,” he said, referring to the
U.S. dollar versus the loonie.

The loonie, as the Canadian dollar is known for the image
of the aquatic bird on the C$1 coin, rose 0.5 percent to
C$1.0009 per U.S. dollar at 5 p.m. in Toronto, it’s largest gain
since Jan. 2. It matched an almost six-month low yesterday and
last traded weaker than C$1.01 on July 27. One loonie buys 99.91
U.S. cents.

Market Swings

The 14-day relative strength index against the U.S. dollar
has been below 30 since Jan. 25 until today, a level that some
traders see as a sign that an asset may be about to reverse
direction. The measure closed at 38.4 today.

“Given that it hasn’t been able to break above C$1.01, we
have seen some sellers come in and maybe position for a bit of a
grind back towards parity,” said Blake Jespersen, managing
director of foreign exchange at Bank of Montreal, by phone from
Toronto, referring to the U.S. dollar versus the loonie. “It
had a lot of momentum up to C$1.01, but since it’s stalled, so I
think you’re seeing some momentum players come in and sell this
with the view it’s going to struggle moving much higher.”

Futures on crude oil, the nation’s largest export, rose 0.9
percent to $97.31 per barrel in New York while the Standard &
Poor’s 500 Index added 0.5 percent.

The loonie’s 120-day correlation coefficient with the S&P
500 was 0.54, its lowest point since November 2008, according to
data compiled by Bloomberg. A reading of one would indicate
they move in lockstep. The currency’s correlation with crude oil
futures was 0.38, the lowest since 2011.

Bonds Fall

The country’s benchmark 10-year government bonds were
lower, pushing the yield up four basis points, or 0.04
percentage point, to 1.99 percent. The 2.75 percent security
maturing in June 2022 fell 31 cents to C$106.41.

The Bank of Canada will auction C$2.9 billion ($2.9
billion) of 1.5 percent notes maturing in June 2023 tomorrow.

The Federal Reserve will hold its benchmark interest rate
at 0.25 percent when it announces its decision tomorrow,
according to a Bloomberg survey of 40 economists. The Fed’s
latest round of bond buying will reach $1.14 trillion before it
ends the program in the first quarter of 2014, according to a
separate survey.

“I think that’s just going to cap the top of the near term
range, up ahead of C$1.01,” said David Bradley, director of
foreign exchange trading at Scotia Capital Inc, a unit of Bank
of Nova Scotia (BNS), by phone from Toronto. “Depending on what comes
out of the FOMC tomorrow, that’s probably the next data point
that’s going to cause any kind of volatility on the market.”

Economic Growth

Canada’s economy expanded 0.2 percent in November, up from
0.1 percent the month before, according to the median forecast
of 21 economists surveyed by Bloomberg. The year-over-year gain
is forecast at 1.4 percent.

Canada’s six largest banks face higher borrowing costs and
a blow to their reputation after Moody’s Investors Service cut
the ratings of the world’s soundest lenders yesterday and warned
there would be no government bailout in a financial crisis.

Canadian banks have become more vulnerable to an economic
downturn because record consumer debt would trigger “elevated”
loan losses, Moody’s said. The nation’s banks, which escaped the
financial crisis with no bailouts, can’t count on sovereign
support as regulators seek to prevent a rerun of global rescues
in 2008 where taxpayer cash was used to prop up banks to
safeguard the wider economy, the ratings company said.

Canada’s banking system was ranked the world’s soundest for
a fifth consecutive year in September by the Geneva-based World
Economic Forum.